‘Seeding the markets’

There has been a move toward micro-finance over the last few years in a number of areas within the impact investment arena. As more consumers adhere to the organic and sustainably farmed initiative themes, there will be a higher demand for this type of enterprise globally.

Although this market is not new, it is being continually “seeded” by Root Capital, an entrepreneurial non-profit founded by Willy Foote back in 1999 with a loan to a cardamom and coffee cooperative in northwestern Guatemala. We tend to believe that these types of loans can often be overlooked by the major lenders and at most would constitute a small portion of their loan book.

According to a March 14, 2015 article in the Economist, “Root’s business is lending to the owners of small farms in poor countries. An estimated 450m of these smallholdings exist worldwide, typically providing a subsistence-at-best income for more than 2 billion of the poorest people on the planet. Mainstream finance has largely ignored them. They face multiple hardships, including land of poor quality, a lack of infrastructure to get their output to market and the constant threat of being wiped out by extreme weather. The lack of access to credit for working capital and investment makes a bad situation worse.”

With any loan from the highest quality to AAA companies to high yield bonds, there are a variety of risks. Think about the recent high yield volatility largely due to one sector in energy. While we cannot vouch for Roots loan portfolio, we feel this specific asset class is a risk worthy of exploration.

“The company says that less than 3% of its loans go bad, a failure rate that would be impressive even among much richer clients. The loans, which come with free advice and training in how best to use the money, are helping farmers increase their productivity and so boost their incomes. The money also protects farmers from having to sell their wares cheaply to the first available buyer. More than half of Root’s borrowers see their income increase by at least 20% a year after receiving a loan; it rises by over 50% for nearly a third of them.”

It is an interesting time in the markets as a robust group of non-profits and for-profit organizations work toward a larger opportunity set for investors. These investments require a lot of due-diligence in order for it to make it as a complement to an existing portfolio.

Keep this in mind as you explore the many possibilities outside the traditional asset allocation.

Sincerely,

Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”